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Partnership & Corportate Accounting Notes
Partnership & Corportate Accounting Notes
LESSON 1: Partnership
Formation of a Business
3 Types of a Business:
- Sole Proprietorship
- Partnership
- Corporation (includes 1 – 15 people, according to R.A 11232 Revised Corporation
Code of the Philippines)
- (Additional: Cooperatives) (More than 15 members)
Definition of Partnership
A Partnership involves 2 or more persons who agree to contribute money, property and
industry (service) to a common fund; and divide profits and losses among partners.
- General Partners (Creditors can use personal assets of Partners to unpaid liabilities
in the business)
- Limited Partners (partners whose limited investments given are proportioned to
shares received, and creditors may not utilize their personal assets)
- Trading Partnership
o Merchandising (Buy and Sell)
o Manufacturing (Producing and Sell)
- Non-Trading Partnership
o Professional Services (Accounting, legal, etc.)
o Non-professional Services (Gardening, make-up, etc.)
Characteristics of Partnership:
- Association of individuals
o Collective agreement among people regarding Partnership
- Mutual Agency
o Agents of Partnership/Common representative
o Partners have equal authority to represent the Partnership and business
- Limited Life
o Partnership dissolves, depending on the Partner’s status (death, voluntary
leave, etc.)
- Profit and Loss Distribution
o Profits and losses are distributed, depending on the stipulation of
agreement, or value of contribution.
- Unlimited Liability
o Creditors can run after Partner’s personal assets to repay liabilities
- Co-ownership Property
o Partners contribute to Common fund
o All assets, liabilities, profits, and losses are shared mutually by all partners
- Plurality of Capital and Drawing Accounts
o Each Partner has different equity and withdrawing accounts
Advantages of Partnership
- Oral Contract
o If contribution is at maximum Php 3000
- Written Contract
o if contribution is worth more than Php 3000
o if contribution contains Immovable Property (land, building, etc.)
o Profit and Loss is Outlined (Written in agreement)
Articles of Co-partnership (These items are made as a contract to officially dictate the business):
1. Name of Partnership
2. Partners Involved
3. Nature of Business
4. Place of Business
5. Classification of General/Limited Partnership
6. Contributions
7. Effective Date and Duration of Partnership
8. Profit and Loss Sharing
9. Rights, Powers and Duties of Partners
10. Accounting Period (Calendar or Fiscal)
11. Treatment of Partners’ Additional Investments and Withdrawals
12. Provision Pertinent to Dissolution and Liquidation
- Republic Act No. 9184 (for the procurement of goods, supplies and services)
- Republic Act No. 6957 (allows LGUs to enter into contractual arrangements with the
private sector to implement infrastructure projects)
o Build-Operate-and-Transfer (BOT
o Build-Transfer-and-Operate (BTO)
Partnership Accounting (2nd File)
Cash xx
Partner, Capital xx
*Memorandum Entry*
Signed By: Partner A
Partner B
Partner C
SAMPLE:
Jan-02
Cash Php 100,000.00
C. Edula, Capital 100,000.00
Equipment 120,000.00
Accounts Payable 15,000.00
E. Dikokaila, Capital 105,000.00
Dadiangas Merchandising
Statement of Financial Position
As of July 31, 20A
Assets
Current Assets
Cash in Bank Php 260,000.00
Accounts Receivable Php 90,000.00
Estimated Uncollectable Accounts 5,000.00 85,000.00
Merchandise Inventory 150,000.00
Non-current Assets
Equipment Php 70,000.00
Accumulated Depreciation 20,000.00 50,000.00
Total Assets Php 545,000.00
Liabilities
Accounts Payable Php 50,000.00
Owner's Equity
M. Penaflor, Capital Php 495,000.00
Total Liabilities and Capital Php 545,000.00
Dadiangas Grocery
Statement of Financial Position
As of July 31, 20A
Assets
Current Assets
Cash in Bank Php 280,000.00
Accounts Receivable Php 50,000.00
Estimated Uncollectable Accounts 2,000.00 48,000.00
Merchandise Inventory 190,000.00
Non-current Assets
Furniture and Fixtures Php 40,000.00
Accumulated Depreciation 30,000.00 10,000.00
Total Assets Php 528,000.00
Liabilities
Accounts Payable Php 70,000.00
Owner's Equity
J. Tamala, Capital Php 458,000.00
Total Liabilities and Capital Php 528,000.00
Partnership Accounting (3rd File)
-To record the value of acquisition, equal to the price to be sold after (or Market Value)
RULES OF DIVISION/DISTRIBUTION
PROFITS
LOSSES
Salary Php xx xx
Partner B: (Periodic Salary x # of periods
(eg: Monthly, weekly, yearly, etc.)
Bonus
Partner A xx xx
Partner B xx xx
Ex:
- Estimation of Depreciation
- Inventory Valuation
- Omission of accruals of Revenue and Expenses
1. Adjustments are to be done on the Opening Balances of Partner’s Equity and affected
Assets and Liabilities
2. Correction of prior period error is excluded from Profit/loss for the period in which error is
discovered
3. Effect of error correction will be divided based on an applicable profit and loss ratio
Header of Schedule: “Schedule of Profit/Loss Distribution” (No more company name/ date)
Common Methods of Distribution/Profit Sharing
* Original Investment
- Allowing Interest, Salaries, or Bonus to partners and dividing any ratio agreed to Remainder
L es s : P ermanent W ithdrawals xx xx xx
B alanc es P hp xx P hp xx P hp xx
Add: P rofits xx xx xx
T otal P hp xx P hp xx P hp xx
L es s : T emporary W ithdrawals xx xx xx
P artner's E quity, E nd P hp xx P hp xx P hp xx
Amy and Ben has a Partnership. Amy’s Capital is worth Php 20,000 and Ben’s Capital is Php
10,000. Chad wants to join the partnership by buying 1/4th of Amy’s interest by Php 7,400.
Answer: Amy, Capital = Php 5000 (Dr); Chad, Capital = Php 5000 (Cr)
1/4th of Amy’s Interest/Capital is Php 5000 only, the bonus of Chad’s investment (Php 2400) is a personal
transaction to Amy to acquire her Php 5000 share of business Assets, creating a new partnership by
admission of partner purchasing assets of another partner.
2) Chad invests Php 10,000 for 1/3 of the business. What journal entry is present?
Answer: 1/3 of Amy + Ben + Chad (Investment) = Chad’s Capital = Php 13,333. Chad only invested Php
10,000 (journal entry increase to cash), so the extra amount is a bonus to Chad, but a credit to both Amy
and Ben. To divide the transfer of Capital between the two of them, they are divided according to the
ratio of their investment: 20,000:10,000 x 3,333, so:
Amy, Capital = Php 2,222 (Dr); Ben, Capital = 1,111 (Dr); Cash = 10,000 (Dr); Chad, Capital = Php 13,333
(Cr) (similar if Chad invests 15,000 to business)
3) Chad wants to withdraw from business, taking Php 10,000, Amy offers to pay.
Answer: Chad, Capital = Php 10000 (Dr); Amy, Capital = Php 10000 (Cr)
By offering Chad his withdrawal of business of 10K, Amy gets to keep Chad’s share of assets worth 10K,
increasing her capital amount. (Similar if Partnership pays, the partnership will offer cash instead of
either of capital amounts)
4) Chad withdraws from business, taking Php 10000, the Partnership only offers Php 9000.
Chad, Capital = Php 10000 (Dr) ); Cash = 9,000 (Cr); Amy, Capital = Php 667 (Cr); Ben, Capital = 333 (Dr)
LIQUIDATION
Liquidation happens if the Partnership cannot fulfil to pay back creditors with their cash assets.
Corporation:
Advantages of Corporations:
2. Stock Corporations
- Corporations for profit, sharing stocks to increase Share Capital
3. Share Capital
- Part of the Corporation’s Capital to be shared to Shareholders through Stocks/Shares
4. Share
- A proportioned, equal part of a Company’s capital, entitling the holder to a proportion of profits
5. Dividends
- Capital compensations to Shareholders, since they have invested money into the business (by
buying shares), dividends are treated as “rewards” to shareholders.
6. Cash Dividend
- Capital Compensation of Cash to Shareholders
7. Share Dividend
- A payment of share, instead of cash, a proportion of share to add into the shareholder’s number
of shares
- Does not create an outflow of cash, but decreases value of share
8. Retained Earnings
- Amount of Net Income left over for the business after paying dividends to shareholders
- RE = Beginning RE + Net Income (or – Net Loss if loss incurs)
1. Cash Dividends
- Reduces value of RE, as well as cash, so there is a cash outflow
- (Paying shareholders Cash for investing in the company through purchasing of shares)
2. Stock Dividends
- No outflow of cash, decreases RE
- Decreases value of share
TREASURY STOCKS
- When a company releases stocks/shares to the market, they are bought by anyone who is willing
to buy these shares so that they can returns from a company’s potion of profits. Considering that
maybe there are too many shares not bought by other investors or an opposing company wishes
to buy the remaining shares, they can “buyback” shares to reduce the amount of shares in the
market (increasing the value of shares limited in the market), and avoiding too many people or
entities entitlement to acquire shares of their profits
- Since these shares are owned originally by the company, the company cannot give itself profits,
so these shares are void of profit and are deducted to retained earnings.
- Cost Method (Most used): Buying Shares back at its Market Value
- Par/Stated Value Method: Buying Shares back at its stated value
Problem Solving:
Sea Wind Resort releases shares after having a profitable year, to increase their business’ value.
To avoid corporate Takeover by outsiders, they bought back 1,500 shares with a par value of Php 1,000 ,
for Php 2,000
Cost:
If Treasury shares are bought at Php 750 (Instead of Php 2000), but retired after (Removed from being
sold, void share):
If the Php 1,000 share was revalued at Php 1,500, but purchased at Php 2,000 , then retired:
If Shareholder gives shares (recorded at memorandum entry since no cash or cash value is involved):
Donated shares are essentially treasury shares. If these were sold at Php 50 each: